Indian Ecommerce: a Big Opportunity for Marketplace Sellers?

This post is by Emma Scotton, Director and Founder at independent ecommerce consultancy KnowGlobal. KnowGlobal offers advice and support to online businesses, both large and small, on all aspects of their ecommerce offering. They help clients grow their businesses both domestically and at an international level.

As the world’s fastest growing ecommerce market, India is becoming a top destination for retailers looking to expand their online business. This year alone, the Indian ecommerce market is set to be worth a staggering $38 billion, demonstrating year-on-year growth rate of over 60%!

What’s more, Morgan Stanley predict that by 2020 this market will be worth $119 billion, so whilst growth rates in our domestic markets are expected to plateau, India offers a vast opportunity for retailers to grow their online revenues in a new and dynamic market.

With a population of over 1.3 billion, India has always had the potential to become the next ecommerce giant but it’s only now that the appropriate ecosystem has started to fall into place to enable ecommerce to really thrive.

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Why Ecommerce in India is Booming

A relentless increase in internet and mobile penetration has seen India add 3 internet users per second making it already the second-largest internet market in the world in terms of users. This is due, in part, to the government’s Digital India project bringing internet access to remote corners of the country and the rapid rise in the availability of 4G. By 2020 India is expected to be home to over 320 million online shoppers, says Morgan Stanley.

This growth in internet penetration is combined with a favourable demographic profile of internet users. 75% of Indian internet users are below the age of 35 and it’s this category who shop more than the remaining population, adding further testament to the great potential of the ecommerce market in India.

The ecosystem has been further nurtured by heavy investments from both the major home-grown players, Flipkart and Snapdeal, and also by America and China’s ecommerce titans, Amazon and Alibaba. As these companies jostle for market share they are spending on logistics, efficient warehousing and local outposts. Coupled with the modernization of India Post, this means that the infrastructure is now in place to support an efficient distribution network reaching even the most rural parts of India.

Increased interest in regulation has also served to alleviate some of the Indian ecommerce user concerns and led to the growing acceptability of online payments, although a strong preference for cash-on-delivery still remains.

Statistics also show an increase in per capita income, which is set to double by 2025, meaning the average consumer has more cash to spend and rising aspirations as to what they want to purchase, which cannot be met within their local market. Ecommerce is increasingly attracting customers from Tier 2 and Tier 3 cities where people have limited access to brands and so are looking online to fulfill their needs.

A further factor which lends India as the next stop for retailers is the fact that the ecommerce community is English-speaking and so there is no need for expensive translations.

India is home to over 22 different languages, written in 13 different scripts and 720 dialects. The result being that historically the language bringing the states together has been English, and in doing so it has become the language of choice for governance and business. India now boasts more English speakers than any other country in the world including the US.

Even the home-grown ecommerce players have their websites in English, making these marketplaces easily accessible for international merchants. However, with ever-increasing mobile and internet penetration providing access to a larger audience, the demand for local-language sites is also on the rise, as the typical web user is no longer a professional citizen based in Delhi or Mumbai.

Existing Ecommerce Trends and Average Consumer Profile

Before deciding to take your business into any new market it is essential to take the time to understand your new target customer and most importantly determine whether there is in fact the demand for your products in that market.

Current research tells us that in India the highest growth rates have been seen in the apparel sector, with more and more Indian consumers taking an interest in fashion and seeking out international brands. This sector is then closely followed by electricals, baby care products, beauty and home furnishings, which are also in popular demand.

The good news for marketplace sellers is that the three most popular retail platforms in India are all marketplaces; Flipkart, Snapdeal, and Amazon India, with consumers looking to these platforms for the variety of goods they’re after and as trusted places to purchase online.

Analysts predict 157% growth in female shoppers in urban areas

Statistics also give us a good indication of who the typical Indian online shopper is, with 38% of regular online shoppers being aged 18-25 years and 52% falling in the 26-35 year old category. 65% of these online shoppers are male. However we can expect the biggest growth rates going forward to be seen in the number of woman purchasing online, with rural areas experiencing 30% growth and urban areas a whopping 157% growth in female shoppers, according to a report from IAMAI-IMRB and Nielsen Informate. Thus a product catalogue which lends itself to this particular profile is almost guaranteed to be a hit.

Indian internet users are spending more time than their global peers using the internet, spending on average 5 hours per day online. Making use of social media accounts for more than half of that time, with 26% more time spent engaging with social media networks as opposed to watching television. Therefore for new entrants to this market it’s worth investing in a successful social media campaign to drive awareness and brand loyalty. There are currently 134 million active social media accounts, increasing on average one every second. The most popular social network in India is Facebook.

As is common in emerging ecommerce markets, Indian consumers show a strong preference for cash-on-delivery as opposed to other online payment methods. Over 45% of online shoppers in India currently opt for cash-on-delivery as their payment method of choice. This is due in part to the low levels of debit and credit card penetration and also to the preference of consumers to physically look, feel and touch something before paying for it.

This cultural nuance can be off-putting for e-retailers as cash-on-delivery orders see the highest rate of returns and rejected deliveries as the customer is not committed to the purchase, which can be costly for merchants. The good news is that as India’s largest ecommerce companies race to enlist more merchants they are pushing consumers to pay digitally and as confidence in ecommerce naturally grows this trend will decline.

The Prevalence of M-Commerce

A unique characteristic setting India apart from most other major ecommerce markets is the prevalence of mobile commerce which is expected to overtake ecommerce in the very near future. With 976 million mobile subscriptions, equating to over 70% of the population, mobile penetration far outweighs internet penetration in India.

The result being that in Tier 1 and Tier 2 cities, 1 out of 3 customers currently make transactions through their mobile phones as opposed to their desktop computers. Statistics show that mobile commerce currently represents 60%-65% of all online retail sales and this is expected to increase to 70%.

What this means in practice is that for retailers to be successful in this market, their websites must be optimized for mobile. The importance of mobile can be seen in the success of Myntra, the biggest Indian ecommerce company for fashion and lifestyle products who operate purely via a mobile app.

However, an app-only approach could be risky as many Indians acquiring smartphones will choose more affordable phones with lower storage options, and this limited space means consumers are likely to show a preference for mobile optimized sites as opposed to downloadable apps.

Marketplaces Provide an Effective Route to Market

The biggest challenges for merchants looking to expand their activities into India are the difficulties surrounding last-mile logistics and the largely cash-based culture. Operating via marketplaces serves to eliminate these barriers by handling fulfillment, and enabling sellers to offer cash-on-delivery to customers therefore maximizing conversion rates.

Not only that but current foreign direct investment rules (more on those to follow) prohibit 100% foreign ownership in B2C ecommerce so utilizing marketplaces provides a legitimate route to the Indian market without the complexities of finding local Indian partners and managing joint ventures.

In any event, marketplaces provide the quickest route to market enabling you to capitalize on their existing customer bases instantly. With the biggest marketplace, Flipkart, seeing 23 million unique visitors per month, selling your products through these platforms gets your products in the sights of your target customers without the trials and tribulations of generating traffic to your own website.

The Indian Government Has Officially Blessed the ‘Marketplace Model’

Years of intense discounting wars between the major Indian ecommerce players resulted in small business campaign groups lobbying the Indian government. These groups argued that marketplaces were infringing foreign direct investment (FDI) rules which strictly prohibited 100% FDI in B2C ecommerce.

Flipkart and Snapdeal, who follow the marketplace model, attracted large foreign investments leading to allegations that these companies were ignoring policy norms to gain an unfair advantage. Flash sales and heavy discounts available online meant that offline retailers in India simply couldn’t compete, leading to calls on the government to clarify the rules and level the playing field.

In March this year the government responded to these claims and decided to bless the marketplace model, but with some key safeguards in place to ensure these marketplaces do not act as the retailer.

Marketplaces are prohibited from having one vendor contributing more than 25% of their sales

The DIPP clarified that FDI in ecommerce companies that own inventories of goods and services and sell directly to consumers using online platforms are prohibited. Marketplace companies are able to provide support services such as warehousing, logistics, fulfillment, call centres and payment collection but must display the contact details for all sellers and warranty and guarantee of products is borne by the seller.

The new rules also ban marketplaces from funding discounts through bonus schemes and marketing cost reimbursement. Sellers can still choose to sell goods at discount if they wish but generally prices online could become more comparable with offline prices.

Arguably the most significant change coming out of the new rules is the fact that marketplaces are now prohibited from having one vendor or group company contributing more than 25% of their total sales. This change poses a challenge to both Flipkart and Amazon India. Flipkart’s largest seller, WS Retail, currently generates more than 25% of their total sales. Similarly for Amazon India, their largest seller, Cloudtail India Pvt, which is a joint venture between Amazon and N.R. Narayana Murthy’s Catamaran Ventures, generates at least 40% of their existing sales.

In practice the changes mean that these marketplaces will need to encourage more and more sellers onto their platforms to become compliant, opening the doors for international sellers to take advantage of this opportunity.

Regulatory and Operational Barriers to Entry

Whilst the opportunity in India for marketplace sellers is clearly vast, merchants need to be aware of the regulatory barriers to entry which are higher than compared to other more mature markets. Sellers must be able to tick a number of boxes in order to register as a seller on Indian marketplaces.

Local Registrations

The first hurdle to overcome is to establish a locally incorporated Indian entity. Merchants are advised to seek guidance as to which company structure to adopt depending on the size and ambitions of the company. Supporting documents will also need to be apostilled and certified by a professional person.

With a local entity established, merchants will then need to register for VAT and CST as well as obtaining a PAN number for personal tax and TIN number for tax identification. With these boxes ticked, merchants will need to obtain an IEC certificate for import/export purposes.

Some further hoops to jump through involve arranging a registered office address in India and also the requirement for an Indian resident director, albeit without any need for them to have a shareholding or any involvement in the day-to-day running of the Indian company.

Merchants will also need to set-up an Indian bank account to receive payment and ultimately work with their bank or foreign exchange providers to repatriate these funds back home.

VAT and Accounts Filings

On-going compliance requires merchants to file VAT returns quarterly, sometimes monthly where the volume of sales is particularly high, and submit annual accounts as you would for your existing domestic entity.

Sales Tax in India can be complex and varies across different states, (although this is currently being reviewed by the Indian authorities and may change in the very near future) and different product types. Merchants will need to seek advice to ensure they are charging the appropriate levels of Sales Tax to consumers on their sales in India.

The good news is that none of this red-tape is insurmountable with the right partners and connections in place and needn’t cost the earth.

Logistics

In terms of managing the delivery of your products to your end-customer in India, merchants are advised to make use of the fulfillment services offered by the leading marketplaces. Not only will this enable you to offer cash-on-delivery but also has added benefits for merchants with regards to extra promotion of their products and improved feedback and ratings.

It also means that merchants need only concern themselves with initial shipment of goods over to India. Goods are required to be stored in India itself and such storage services are offered as part of the marketplaces’ fulfillment solutions.

Key Factors to be Evaluated Before Entering a New Ecommerce Market

Emma Scotton

Before making the leap and setting up in any new market, merchants will need to take the time to understand the intricate landscape of new markets in addition to their own internal capabilities and limitations.

Ecommerce Readiness: take the time to fully understand the payment and logistical infrastructure, consumer behaviour and technological developments so that you’re prepared to meet the needs to of your new target consumers.

Scope of Growth: look at levels of internet penetration and the demographics of the online buying population, is this likely to deliver your business the growth you’re looking for?

Barriers to Entry: understand the regulatory environment and connect with the solution providers you need to put your market entry plans into practice.

Competition: assess the degree of competition, are you able to compete on either price or the nature of your offering?

With these factors in mind, the Indian market presents an unrivaled opportunity for merchants in terms of market size, ecommerce readiness and scope of growth it has to offer.

What’s more, making the right connections can make light work of the regulatory barriers to entry. Speak to the KnowGlobal team for independent and practical advice to get your business trading in new markets today.

Note: This publication is for information purposes only and does not constitute advice. All references to regulatory frameworks are based on our current understanding of legislation. Whilst every effort has been made to ensure accuracy, information contained in this briefing should not be acted upon without seeking professional advice.

KnowGlobal has 30 years industry experience and a network of independently accredited and trusted solution providers, to provide the know-how and solutions to help ecommerce businesses succeed. You can reach them at +44 (0)203 585 1471 or knowmore@knowglobal.com.

Need help with cross-border trade?

Get expert advice and save 3%+ on every foreign currency sale. Tools for translation, currency exchange, international shipping and fulfillment, returns handling, VAT and more. All in the Web Retailer directory.